Liberal Democrats plan U-turn on Barnett Formula

THE Liberal Democrats are planning radical changes to their economic policy as they prepare to ditch plans to scrap the Barnett Formula and instead protect funding for Scotland, Scotland On Sunday can reveal.

Danny Alexander also plans to lift the National Insurance threshold as he puts together the Lib Dem general election platform. Picture: PA

The Lib Dem manifesto for the next general election will also contain a pledge to increase the point where people have to pay National Insurance contributions, it has emerged.

The proposal is in line with the Lib Dem policy pushed through by the coalition government with the Conservatives to raise the threshold where people start to pay income tax to above more than £10,000. The proposals for the 2015 general election manifesto are being put together by the Chief Secretary to the Treasury, Danny Alexander, and are likely to be among the key demands in any coalition negotiations with the Tories or Labour.

Currently the polls suggest that while the Lib Dem vote has been squeezed to 9 per cent, they are still likely to hold the balance of power after the election.

The party is already laying out its terms for the next government. Last week it revealed plans to exempt many people from the bedroom tax.

The Lib Dems went into the 2010 election pledging to abolish the Barnett Formula, which was created in the 1970s to decide the balance of block grants around the UK. Critics believe it penalises Wales and some English regions but overpays Scotland by £3 billion.

However, a source close to Alexander has said that his spell in the Treasury has convinced him the formula should stay. “It works and would be extremely difficult to replace,” he said.

In addition, Alexander believes the next bill to devolve more powers to Scotland will be in the first Queen’s Speech, whoever wins the election.

The source said: “There is almost complete agreement among the three main parties that income tax should be completely devolved to Scotland. This would mean that the block grant for Scotland would be reduced anyway which would make it much less of an issue for the rest of the UK.”

Meanwhile, Alexander has made it clear privately that he disagrees with Tory Chancellor George Osborne’s plans to combine National Insurance and income tax into a single tax.

The Lib Dems have already confirmed they will pledge to raise the income tax threshold to £12,000, which would mean those earning the minimum wage full-time would pay little or no income tax.

From next April, the threshold will stand at £10,500 and there has been speculation that Osborne may raise it to £12,000 to steal the Lib Dem’s thunder.

But Alexander has also let it be known privately that once the £12,000 target has been reached his party will push for a similar rise in the point where people have to pay National Insurance. Currently people are liable to pay NI if they earn £153 a week or more, which equates to £7,956 a year.

A source close to Alexander said: “Combining income tax and National Insurance is too expensive and would be very difficult. We have looked at it and already ruled it out.

“However, once we have reached the £12,000 threshold with income tax, we will want to radically raise the threshold from where people pay National Insurance. That seems a fair way of giving people a tax cut and will mean many more people will have more money in their pockets.”